Interest deduction on borrowed funds requires proof of business purpose and commercial expediency; unsupported claims fail.

Deduction of interest on borrowed capital under section 36(1)(iii) is allowable only where the assessee proves that the borrowing was for business purposes and supported by commercial expediency. On the record, the assessee failed to comply with earlier directions and did not produce loan agreements or other material showing a business justification for borrowing at a higher rate and advancing funds at a lower rate. The requisite nexus between the borrowing and the claimed business purpose was therefore not established, and the disallowance of the interest expenditure was upheld.

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Issues: Whether the assessee was entitled to deduction of the interest expenditure claimed on borrowed funds under section 36(1)(iii) of the Income-tax Act, 1961, despite advancing funds at a lower rate of interest and failing to substantiate business expediency.

Analysis: The assessee was required to show that the borrowed funds and the interest paid thereon were for the purposes of business and that the arrangement reflected commercial expediency. The record showed repeated non-compliance with the directions issued in the earlier round and failure to produce supporting evidence such as loan agreements or material demonstrating a business justification for borrowing at a higher rate and advancing funds at a lower rate. In these circumstances, the assessee did not establish the requisite nexus between the borrowing and the business purpose claimed. The fact situation was distinguished from cases where business expediency had been proved on evidence.

Conclusion: The disallowance of the interest expenditure was upheld and the claim under section 36(1)(iii) failed.

Ratio Decidendi: Deduction of interest on borrowed capital is allowable only when the assessee proves that the borrowing was for business purposes and that the expenditure was supported by commercial expediency; a mere assertion is insufficient where the evidentiary burden is not discharged.

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